Finance Minister Nirmala Sitharaman will present her fifth consecutive budget on February 1 this year. The Union Budget, as the blueprint for the Central Government’s expenditure and receipts, attracts a lot of attention. But its importance in overall government spending has declined over time. Here are five charts that illustrate this argument in detail.
State expenditure has overtaken central expenditure in India.
State governments combined now spend more money than the Center in India. A comparison of central and state expenditure figures from the RBI database shows that the share of central expenditure in total government expenditure fell below 50 per cent for the first time in 1999-2000. While the Centre’s share crossed the 50% mark in 2002-03, between 2008-09 and 2010-11 and in 2020-21, it crossed the 50% mark in every other year since 1999-2000. Stayed below. The increase in Centre’s expenditure in 2020-21 was probably a result of the pandemic and it has gone down in the next two years for which data is available.
See Chart 1: Share of Central and State Expenditure in Total Government Expenditure in India
The fiscal deficit of the states did not increase significantly after the pandemic.
The central government’s fiscal deficit has seen a sharp increase in the wake of the pandemic. It rose to 9.2 percent of GDP in 2020-21, and has yet to fall back to pre-pandemic levels. Unlike the Centre, states are far more restrained as far as post-pandemic fiscal deficits are concerned. While the figure rose to 4.1 percent of GDP in 2020-21, it declined sharply to 2.8 percent in 2021-22, according to provisional estimates. While the Budget Estimates (BE) of states’ fiscal deficit for 2022-23 is 3.4%, it needs to be kept in mind that the Provisional Estimates of Fiscal Deficit for 2021-22 BE and Revised Estimates (RE) numbers. was less than for 2021-22, which suggests that the fiscal deficit figure for 2022-23 may also be lower than the BE figures. To be sure, a stable fiscal deficit does not mean that state finances have not been damaged by the pandemic. This tension can be seen in the high debt-to-GDP ratio for the states which increased from 26.7 per cent in 2019-20 to 31.1 per cent in 2020-21 and only 29.5 per cent as per BE numbers for 2022-23. Hope to. .
See Chart 2: Center and State Fiscal Deficits
Individual states have varying levels of dependence on tax distribution from the Centre.
To be sure, the headline numbers on state spending mask huge differences in the spending capacity and patterns of individual states. The first major difference is in terms of dependence on central taxes for state expenditure. Data from the Center for Monitoring Indian Economy (CMIE) database shows that the share of central taxes in the total tax revenue of states varies significantly from state to state. Among larger states, the share is less than 20% for states like Maharashtra, Karnataka and Tamil Nadu but 66% for states like Bihar. States’ share of central taxes is determined according to a formula decided by the Finance Commission, a constitutional body that meets every five years.
See Chart 3: Share of Central Taxation in Total Income of States
However, the actual share of states in central taxes is less than what the Finance Commission says.
This results in the Center keeping a large portion of its taxes out of the distributable pool. The Finance Commission’s formula for sharing revenue with the States does not apply to the Centre’s tax revenue collected under the heads of cesses and special duties. This means that the share of states in the total tax revenue of the Center is much less than the 41% share currently mandated by the 15th Finance Commission. In fact, this share has come down significantly over the past few years. This has been a major source of friction in the framework of India’s fiscal federalism.
See Chart 4: Share of States in Total Tax Revenue of the Centre
To be sure, states also vary in their spending priorities.
While states always make it a point to raise issues that work in their favor in the debate on India’s fiscal federalism, qualitative differences in the spending patterns of different states receive little attention. For example, the share of spending on pensions varies widely across states. It is 14% for Himachal Pradesh and almost zero for Delhi. Similarly, the share of non-development expenditure – which includes expenditure on administrative services, salaries and pensions, interest payments, etc. – of the states’ total expenditure varies from just 11 per cent in the case of Delhi to 41 per cent in the case of Punjab. .
See Chart 5: Share of Pension in Total Expenditure of States
Although some of the states’ spending commitments are legacy commitments and therefore difficult to change abruptly, their focus, or lack thereof, on aligning spending patterns with current and future growth and sustainability needs is a public concern. It plays a major role in determining the quality of expenditure. Indian economy. Given the fact that states spend more than the Centre, the Union Budget plays only a limited role on this front.